Tuttle v. Sky Bell Asset Management, LLC, No. C 10-03588 WHA, 2011 WL 208060 (N.D. Cal. Jan. 21, 2011).  

In this case, a District Court in California declined to remand the action to state court holding that to apply the security exception to CAFA, the action should solely relate to breach of fiduciary duty pursuant to a security. 

The plaintiffs brought this prospective class action on behalf of owners of limited partnership units in seven limited partnerships controlled by the defendants, Sky Bell Asset Management, LLC, and its CEO, Gary Marks, asserting claims for (1) breach of fiduciary duty; (2) aiding and abetting breach of fiduciary duty; (3) negligence; (4) unjust enrichment, and (5) an accounting.

In this action, there were 25 named defendants, including the seven limited partnerships, their general partners, officers and auditors. Sky Bell served as General Partner or Co-Partner in seven Limited Partnerships.  Sky Bell, and the other General Partner defendants, assumed the duty to perform adequate due diligence; deal fairly and honestly with Limited Partners; manage the investments properly; manage and operate the investments in the best interest of the Limited Partners and execute transactions in accordance with the goals and objectives of the Limited Partners with a permissible degree of risk.  The plaintiffs alleged that the General Partner defendants failed to fulfill these duties by failing to properly conduct due diligence and investigate the funds in which the money was invested, and the Auditor defendants failed to “comply with applicable auditing standards” which would have revealed these breaches of duty.  The plaintiffs asserted that all the defendants failed to “use such skill, prudence, and diligence as other members of the investing profession commonly possess and exercise;” as a result, the plaintiffs lost “tens of millions of dollars of their savings and retirement nest eggs.”

The defendants removed this action to the federal court in August 2010.  

In November 2010, the District Court declined to remand the action to state court because there was federal jurisdiction under SLUSA.  The order gave leave for the plaintiffs to amend the complaint to remove the allegations of fraud that brought the action within SLUSA’s scope. 

The plaintiffs accordingly, filed a motion to amend the complaint removing the allegations concerning SLUSA, and a renewed motion to remand. The District Court found that due to the amendments, the action no longer fell under SLUSA, and accordingly, granted the motion to amend complaint. The Court, however, declined to remand.

The Court observed that even if SLUSA did not apply, there was federal jurisdiction under CAFA, 28 U.S.C. §1332(d)(2).  

The plaintiffs, however, argued that exceptions to CAFA jurisdiction applied here.

The Court noted that under §1332(d)(9)(A-C), CAFA does not apply to any class action that solely involves a claim concerning (A) a covered security as defined under 16(f)(3) [1] of the Securities Act of 1933 and section 28(f)(5)(E) of the Securities Exchange Act of 1934; (B) the internal affairs or governance of a corporation or other form of business enterprise and that arises under or by virtue of the laws of the State in which such corporation or business enterprise is incorporated or organized; or (C) that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 (15 U.S.C. 77b (a)(1)) and the regulations issued there under). 

First, the Court observed that if a complaint contains a claim implicating one of CAFA’s exceptions, but also involves other non-excepted claims, the case should remain in federal court.  While the second amended complaint did contain claims relating to securities, there were also non-excepted claims, including a claim for simple negligence.  Accordingly, the Court concluded that the instant action did not solely involve a claim concerning a covered security as required by the statutory language.  Thus, the exception to CAFA jurisdiction set out in subsection (A) did not apply.

Second, the Court stated that the internal affairs exception precludes federal jurisdiction over a class action if the class action solely involves a claim that (1) relates to corporate internal affairs; and (2) arises under the laws of the state where the company is incorporated.  The Court found that as the class action involved claims against numerous defendants, including negligence claims against outside auditors, it did not relate solely to the inter-relationship between one company’s general partner and its limited partners. Because there were 25 separate defendants, incorporated in numerous states, the plaintiffs’ claims did not arise from a single state where the company is incorporated. Thus, the Court found that subsection (B) exception did not apply.

Finally, concerning subsection (C), the plaintiffs stated that CAFA expressly excludes claims related to covered securities and those relating to fiduciary duties ‘to avoid disturbing in any way the federal vs. state court jurisdictional lines already drawn’ by SLUSA, and relied on In Re Textainer Partnership Securities Litig., No. C 05-0969 MMC, 2005 WL 1791559 (N.D. Cal. July 27, 2005) for support. (Editors’ Note: See the CAFA Law Blog analysis of Textainer posted on October 28, 2005). The Court found that Textainer was distinguishable because the plaintiffs brought only one cause of action for breach of fiduciary duty; thus, the action could literally be said to solely relate to breach of fiduciary duty related to or pursuant to a security.  By contrast, in the instant action, the plaintiffs brought five separate claims including a claim for negligence; therefore, the Court concluded that the plaintiffs’ claims did not relate solely to a breach of fiduciary duty concerning a security.


Because the Ninth Circuit has not yet interpreted this provision of CAFA, the Court looked to Second circuit decisions–Greenwich Fin. Servs. Distressed Mortg. Fund 3 LLC v. Countrywide Fin. Corp., 603 F.3d 23, 32 (2d Cir. 2010), which had followed In Estate of Pew v. Cardarelli, 527 F.3d 25, 31-33 (2d Cir. 2008). (Editors’ Note: See the CAFA Law Blog analysis of Pew posted on August, 20, 2005). Greenwich hasstated that “the phrase ‘solely involves’ ensures that federal jurisdiction under CAFA cannot be defeated by adding a claim that falls within a §1332(d) (9)(A-C). Thus, in order to fall under the exception, the plaintiffs’ class action must “present only a single claim grounded in the terms of a document that creates and defines a security.”  Under Estate of Pew, it is not enough for a claim to merely tangentially relate to a security; the terms of the security must provide the basis for the claim.  As that was not the case here, the Court concluded that the instant action did not fall under the exception (C).  

Accordingly, the Court concluded that CAFA jurisdiction applied to this action.